Tuesday, July 26, 2011
Posted by D. Daniel Sokol
Yuliya V. Bolotova, Cornell University and Andrew M. Novakovic, Cornell University provide An Empirical Analysis of Pricing in the United States Cheese Industry: 2000-2010.
ABSTRACT: The U.S. cheese industry has historically used the organized Exchange spot cheese prices as reference prices in contract cheese market. Furthermore, the Exchange cheese prices have been influencing government-set prices of milk used in cheese manufacturing (i.e. Class III milk). The thinness of the Exchange spot cheese market has been raising concerns as to whether it adequately represents the cheese market fundamentals, which is important for the effective performance of cheese industry. The empirical evidence presented in the paper may suggest that due to the nature of cheese manufacturing, which basically depends on one input (milk), and a presence of government milk pricing, Class III milk price has become a key strategic variable in the modern cheese industry. While variation in cheese production and stock explains 4-15% of variation in the Exchange cheddar cheese price, variation in lagged Class III milk price explains 72% of variation in the Exchange cheddar cheese price. Furthermore, the effect of lagged Class III milk price on the Exchange cheddar cheese price and its variance tends to be stronger than the effect of cheese production and stock.